Speaker Kevin McCarthy tweet:
“House Republicans just voted unanimously to repeal the Democrats’ army of 87,000 IRS agents. This was our very first act of the new Congress, because government should work for you, not against you.”
In the debt crisis deal worked out between President Biden and House Speaker McCarthy, Republicans got some of what they wanted, a cut in funding of the IRS. They had campaigned on the fear that more Americans would be audited. It turns out that the IRS is able to move some money around administratively, so most of the planned replacements will take place after all. Both sides can claim they won. This is why legislation is called "sausage-making."
I am happy the IRS will be stepping up audits. I am not afraid of them. I want tax cheats to be afraid of them.
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| Foreground vineyard. In back, the rental house. |
The system of recording wages and withholding taxes works well for most taxpayers. The website The Hill reports:
Different parts of the economy are compliant with tax laws to different degrees. Workers and employees are the most law-abiding segment, reporting their wages and salaries with 99 percent accuracy, while business owners are far less tax law-abiding.
Among the least compliant sectors are farmers, whose income is subject to “little or no information reporting,” according to the IRS. Sixty-four percent of all farm income is misreported to the IRS, while business owners in sectors other than agriculture report their income with only 43 percent accuracy.
I thought I was a knowledgeable taxpayer. I had the normal tax experience of a two-income American household, mostly earned income reported on a W-2 form, with a little side-business growing melons. Then I decided to put in a vineyard, which increased the scale of my farm operation. I entered a whole new world of tax complexity. As part of this transition I also made a rental house out of the place my grandparents built 100 years ago. These gave me new insight into the complexities of tax deductions and income sheltering. It is amazing to me what is completely and totally legal. Farms and real estate investments have the effect of sheltering (i.e. not paying taxes on) current income and turning tax deductions into capital investments. Investment gains will be realized (i.e. paid taxes on) at a lower rate, and probably never. When people die the government will "step up" the value of the farm and farm house to its value at my date of death, thus escaping taxes on the gain in value. And, at Republican urging, the limit before heirs pay federal inheritance taxes, which might capture that gain, has been raised to almost $13 million per person, $26 million per couple, far, far beyond my situation.
What a deal.
There won't be revenue from the grapes for four or five years, so I don't have income to worry about for a while. In the meantime, I have a complex array of deductions. Some farm equipment and buildings depreciate over five years. Some over seven years. Some over 27 years. There are special depreciation rules for vineyards, which accelerate realization of deductions. Did you know that irrigation equipment for the vineyard which is visible above ground (sprinkler heads) depreciate at a different rate than irrigation lines that are buried? I didn't. Live and learn. There are distinctions between improvements to the rental house. Some can be expensed and are deductible this year against rental income, i.e. replacing the dishwasher. The cost of replacing the gutters is handled differently, a capital cost that is depreciated along with the house. I am just reporting what I think I have learned. Don't take tax advice from me. My CPA handles the details. I show him the receipts and tell him what they are for. There are lots of receipts.
Tax compliance on these two small businesses is an entirely different realm than getting a W-2 form at the end of January and paying taxes on the income. It is eye-opening. The rules are complex and the expenses open up a gray area, and much of this is self-reported. There isn't anyone looking over a farmer's shoulder counting the hay bales that come off an alfalfa field. I gathered lots of receipts for pipes, posts, and trellis wire, to bring my CPA, but there is no automatic third-party mechanism to know or check if they are legitimate. It disappoints me, but does not surprise me, that self-reporting of expenses and income is a primary arena for tax cheating.
By fiscal year 2022, budget cuts had left the IRS with only about 1,400 staff-years of revenue-agent time to apply to the 165 million income tax 1040 returns. Fewer than 2% of the returns of millionaires are being audited. We don't know how big the gap is between taxes legally owed and taxes in fact collected, but estimates range at about $400 billion to $700 billion a year, about 15% of the owed taxes. Conservative media expresses shock at people entering stores and openly shoplifting. I am shocked, too. Where are the security guards? Where are the police? Why aren't these people being prosecuted?
But that is small potatoes. The real money being stolen is being done under the nose of the IRS. The GOP needs to own the fact that they are enabling millionaires to steal, because it is on larger, more complex returns, that there are such opportunities for mischief. Republicans have defunded the police.
Tomorrow: The statistics on tax audits. Another spoiler: To paraphrase Willie Sutton on why he robbed banks. Go where the money is.
6 comments:
What we need is a graduated income tax, minus all the loopholes, that would bring in enough to cover all our federal expenses. That isn’t likely to happen in our lifetime. Ronald Reagan, who was the patron saint of Republicans until Donald Trump came along, easily convinced his party that reducing federal revenue would increase federal revenue: tax cuts for the wealthy would magically pay for themselves. So now the wealthy have become the super-rich while the nation sinks ever deeper into a hopeless quagmire of debt. It’d be a robber baron’s dream if it wasn’t so untenable.
Yes, understanding the tax code and the rulings f the tax court will reveal many legal deductions and credits that the diligent reader can take advantage of, rich and poor.
Yes, we have a complex tax system, and I am thankful to the tax publications available originally in my public library when I started doing my own taxes back in the '70s using paper paper forms and pen/pencil to fill in the blanks. I learned what documentation that had to be included, and what did not. I learned to double check my work, and make things legible.
During those paper days, I made a mistake once transcribing a number from the front of the 1040 to the back. Fortunately in my favor, increasing my refund.
Once TurboTax was first offered, I immediately purchased a copy, and continued to do so for decades since then. My tax return got more and more complex as in addition to W2's to report, there were 1099's, and brokerage reports to include.
Fortunately for me, our income continued to grow, as did our investment accounts. We continued to review the tax laws and changes. One wake-up call was in the early 80s when the "Social Security won't be there" scares reared their ugly head, and we decided to fully fund our IRA's and/or our 401K's; nope you cannot do both.
We are glad we knew the tax law, and took advantage of everything we could.
Must have done everything right as we only got nice letters from the IRS. No problems to correct. Even TurboTax was nice, agreeing to help us if there was any issue with the IRS and our return.
Our returns got more and more complex. They grew in size to several hundred pages, fortunately all digital copies of everything. We didn't even need to mail in our tax returns, being able to file online in recent years.
One surprise we got was from the State of Oregon - there are limits as to how much of our federal tax obligation was deductible on our Oregon income tax return. Of course, we were not happy to learn that. I'm pretty sure others weren't either.
In any case, the words of Judge Learned Hand are still very true today:
"Any one may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one's taxes."
Our ridiculously complicated tax code should be radically simplified. Think of all the energy that could be released for more creative and productive pursuits.
I understand why surgery and plumbing require a level of expertise beyond the grasp of simple mortals, but I don't understand why taxes are so complicated that even the simplest small business needs an accountant to be in compliance.
As long as some people value money above everything else in life I suppose we will be struggling with the cost of a civilized society. It's a pipe dream, I know, but wouldn't it all be easier if everyone earned the same amount, and all of society's needs were taken care of regardless of status?
"Imagine all the people
Sharing all the world
You may say I'm a dreamer
But I'm not the only one
I hope someday you'll join us
And the world will live as one"
- John Lennon
Given what I suspect about human nature, if everyone made the same amount of money no matter what, there would not be enough people motivated enough to fulfill our need for highly skilled people like cardiac surgeons and plumbers.
Im all for eliminating the effing Income tax. How I miss tge “short form”, back when I was a lad.
Anybody remember the “Income Tax SimplificationBill” passed by our so-called representatives maybe 25 years ago?
Money Magazine sent out I believe 100 hypothetical families for tax preparers, irs agents, and innocent bystanders. All were identical. Money Mag's experiment yielded 100 different amounts owed the feds, ranging from refunds to over $20,000!
That said, how do the Revenuers expect us mere mortals to be able to file accurate returns?
My tax preparer(whose efforts following our becoming her clients, UNDOUBTEDLY saved our marriage), told us that tge Income tax Simplification Bill is known amongst tax preparers as the “Tax Preparers' Job Security Bill”. No shit, Sherlock.
Income tax? The only winners are the Uber rich. Get rid of the damn thing.
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